This is the interest rate you should care about

For all of the talk about how low interest rates are and how long they will stay low, Americans have mostly missed the fact that the interest rate that may be most important to them isn’t low at all.

BankRate.com this week pegged the average variable credit-card interest rate at 15.66%, the highest level since it started surveying variable rates in 2005. Variable card rates didn’t burst through the old record with some big jump, they simply continued inching up, continuing a slow, inexorable trend that started with the passage of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009.

The timing of the new highs could not be much worse for consumers. Americans added $28.2 billion to their credit card balances during the second quarter of 2014, the largest quarterly amount in the last six years, according to CardHub.com. That debt expansion nearly erased the $32.5 billion that consumers paid off during the year’s first quarter. Read: American credit-card debt hits post-recession high.

With the average credit-card debt per U.S. adult — excluding zero-balance cards and store cards — now standing at just under $5,000, according to TransUnion, and with the Federal Reserve saying there’s nearly $900 billion in outstanding revolving debt and well over $3 trillion in outstanding consumer debt, little moves up in credit-card rates add up. The average household credit-card balance has fallen from nearly $8,500 around the time of the financial crisis in 2008 to about $6,800 today.

While most consumers haven’t necessarily noticed the rate creep because it has been so gradual, the situation causing the increase also should guide consumers on how they might respond to it, because it’s harder to evade high rates now than it was in the past.

One facet of the CARD Act is that it prevents card issuers from raising rates on an existing balance until the cardholder becomes 60-days delinquent.

Before that provision was put into place, consumers faced a landscape where the moment a payment was late, the card issuer would jack up rates. Thus, a consumer who signed on for a deal at, say, 9%, would come up a day late and see their tariff double to 18%, a steep price to pay.

The 60-day rule helps consumers, but it is hard on card issuers, because they can no longer re-price an existing balance based on a customer’s bad behavior. Greg McBride, chief analyst at BankRate.com, compared the situation to an auto-insurance company being unable to raise premiums until a car is totaled, no matter how many speeding tickets or drunken-driving citations a driver receives.

“Since the CARD Act, issuers price for that risk on the front end, because they understand that of everyone who qualifies, some of those people will do the things that used to result in higher rates, but which they can’t penalize now,” McBride said. “As a result, the rate that the consumer with average or decent credit is getting when they apply for a card is higher now than it would have been several years back prior to the CARD act going into effect.”

The news hasn’t been all bad for consumers, just for the ones who don’t have pristine or near-perfect credit scores.

For the people with terrific credit records, lenders are competing harder than ever, and there are still sweet offers and deals to be had. McBride noted that “for anyone with great credit, rates have actually been coming down a little bit.”

Gerri Detweiler, director of consumer education for Credit.com, noted that offers for teaser-rate and balance-transfer deals are up in the past year or so, “but they are temporary offers that you either act on or they go away quickly — and if they offered you zero percent for 12 months or 3.99% for 18 months now, the offer might not be so good three months from now — and the really low rates are few and far between and you have to have really good credit.”

“The people who need to get a better rate on their cards are the ones with a lot of credit and credit-card debt, and the lenders aren’t making their best offers to those people,” she added.

When interest rates were on their long descent to current levels, most credit-card users backed away from fixed-rate cards, going to variable-rate offers that were particularly attractive.

The problem with the average variable-rate reaching new highs is that it made that move without any impetus from the broader rate picture.

Thus, when the big, most-impactful measures of interest rates start to rise, there’s little doubt that the variable credit-card averages will jump, with lenders trying to stay ahead of the curve.

“Regardless of where you fall in the credit spectrum, the environment is ripe for shopping around to see what you can get, particularly if you have been paying your debt down and making payments on time and maybe improving your credit score over time,” McBride said. “If you have average credit, don’t hold your breath for that zero percent balance-transfer offer that you would have easily snagged 10 years ago, but don’t think you can’t improve what you’ve got because lenders are competing right now, even for the average consumers.”

Detweiler noted that consumers with credit-card debt might consider peer-to-peer lending — commonly called P2P loans — as a means of circumventing the banking system and its rate creep. Detweiler noted that while the average consumer hasn’t heard of P2P loans, let alone investigated them, they’re worth a look-see, particularly at a time when consumer debt rates are creeping up.

“You know that when the Fed raises rates and we see the big-picture rate environment change that the consumer rates and credit-card rates are going to follow that trend, and probably move even more sharply than those other rates,” Detweiler said. “If you believe that rates are going up, and that they are going to affect you — and they are — then now is the time to be looking for something better, even if it’s not the best time in history to be searching for deals.”

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